Defense stocks enjoyed a relatively quiet earnings season compared to many sectors, with companies largely reporting only minor issues due to the COVID-19 pandemic.
That could change in the months to come, especially if the pandemic response forces the government to divert resources away from defense spending and to other areas. But overall defense companies appear to be a safe haven in a volatile world, with a reliable customer paying the bill and substantial demand for its products.
For investors interested in adding to their sector exposure, here are three defense stocks worth buying right now.
Image source: Getty Images.
Lockheed Martin has a portfolio for all seasons
Lockheed Martin (LMT 1.05%) is the world's largest pure-play defense contractor, with a sprawling portfolio of aircraft, helicopters, missiles, and electronics that offer exposure to some of the areas of vital exposure to the Pentagon. The company is best known as the maker of the F-35 fighter, a potential trillion-dollar program that is just beginning to ramp and should be a revenue producer for the remainder of the decade.
The F-35 has a massive supply chain and global production, and it was impacted briefly earlier in the year due to the pandemic. Further disruptions are possible, but Lockheed Martin investors can sleep tight knowing the company has a $144 billion backlog of orders including a range of missiles and missile defense systems.
Lockheed's THAAD system is the primary defense against threats from North Korea and elsewhere. Its Sikorsky helicopter unit is a finalist in two massive Army competitions worth a combined $60 billion. And the company's space and research labs are involved in a range of sensitive and critical Pentagon tasks, including in the area of hypersonics, or missiles traveling more than five times the speed of sound.
Lockheed Martin shares are roughly flat year to date, outperforming the S&P 500 by about 10 percentage points. The stock is priced at 17 times earnings, in the mid-range for defense trailing Northrop Grumman but ahead of General Dynamics and the newly-formed Raytheon Technologies.
Lockheed Martin's business was set up well to outperform for years to come even before COVID-19, and the pandemic has done nothing to change the company's long-term outlook.
Leidos is the biggest player in an important market
Government IT providers appear an attractive sector to take shelter during the pandemic market selloff. Remote workers, including government workers, mean a renewed emphasis on the IT networks these companies maintain, and in the post-pandemic world their services, and network upgrades, are likely to be of increasing importance. These companies lend themselves well to work-from-home conditions, lacking the large manufacturing facilities that more traditional defense contractors rely on.
Leidos Holdings (LDOS -1.05%) owns the largest government IT business, giving the company the scale and pricing power needed to take business from smaller rivals. Leidos prior to the pandemic was also aggressively expanding into new businesses, announcing two $1 billion-plus deals in the span of a few weeks to add to its advanced electronics and R&D capabilities, and to become a market leader in security screening hardware and services.
Illustration of the Gremlins drone demonstration project in action. Gremlins is part of the Dynetics portfolio that is now part of Leidos. Image source: Dynetics.
Growing its airport screening business just prior to the pandemic now appears to be an ill-timed move, and Leidos did report a choppy quarter that was impacted on many fronts by COVID-19. The company saw a delay in the rollout of a large hospital IT deal, and faces near-term uncertainty in some areas due to the pandemic, but Dynetics, its other recent acquisition, has already scored some defense wins and remains one of the most respected space and electronics research shops in the business.
Leidos shares are still up 4% year to date, but the stock has lost 10% since Feb. 15. The next few quarters could be choppy but Leidos is one of the most promising growth stocks in defense, with the potential to be much larger than its current $14 billion market capitalization a few years down the road. Take advantage by buying the COVID-dip today.
ManTech is ready for action
Staying on the government services theme, ManTech International (MANT) is an under-the-radar services company that has steadily revamped its business away from grittier tasks including handling military logistics and managing facilities in the Middle East, and towards tech.
The company today is a growth machine, generating 15% organic sales growth in the recently-completed first quarter and posting an outstanding 1.8x book-to-bill ratio for the quarter. New business made up more than 90% of first quarter awards, giving the $2.9 billion market capitalization company a total backlog of $9.3 billion at quarter's end.
ManTech also has one of the sector's best balance sheets, with just $26 million in net debt. The company in the past has been an active acquirer in what is a fragmented business, and I would expect to see further deals on the horizon to allow the company to expand its expertise into new areas.
CFO Judy Bjornaas on a late April call with investors said ManTech remains focused on deals, saying "we anticipate M&A activity to increase as we recover from the pandemic. We are in an excellent position to review opportunities as they arise."
In the meantime, investors can enjoy a dividend yielding more than 1.7% at current prices. But over time I'd expect ManTech to either put that pristine balance sheet to work to become a much larger company, or to be taken out at a premium to current prices.
